Correlation Between Medium Duration and Equity Index

Can any of the company-specific risk be diversified away by investing in both Medium Duration and Equity Index at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Medium Duration and Equity Index into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Medium Duration Bond Institutional and Equity Index Investor, you can compare the effects of market volatilities on Medium Duration and Equity Index and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Medium Duration with a short position of Equity Index. Check out your portfolio center. Please also check ongoing floating volatility patterns of Medium Duration and Equity Index.

Diversification Opportunities for Medium Duration and Equity Index

-0.66

Correlation Coefficient

Medium Duration  Equity Index

Excellent diversification

The 3 months correlation between Medium and Equity is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Medium Duration Bond Instituti and Equity Index Investor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Index Investor and Medium Duration is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Medium Duration Bond Institutional are associated (or correlated) with Equity Index. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Index Investor has no effect on the direction of Medium Duration i.e., Medium Duration and Equity Index go up and down completely randomly.

Pair Corralation between Medium Duration and Equity Index

Assuming the 90 days horizon Medium Duration Bond Institutional is expected to under-perform the Equity Index. But the mutual fund apears to be less risky and, when comparing its historical volatility, Medium Duration Bond Institutional is 2.47 times less risky than Equity Index. The mutual fund trades about -0.18 of its potential returns per unit of risk. The Equity Index Investor is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  5,746  in Equity Index Investor on September 16, 2024 and sell it today you would earn a total of  305.00  from holding Equity Index Investor or generate 5.31% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Medium Duration Bond Instituti  vs.  Equity Index Investor

Medium Duration Bond

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Medium Duration Bond Institutional has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Medium Duration is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Equity Index Investor

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Index Investor are ranked lower than 8 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Equity Index is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Medium Duration and Equity Index

The main advantage of trading using opposite Medium Duration and Equity Index positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Medium Duration position performs unexpectedly, Equity Index can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Equity Index will offset losses from the drop in Equity Index's long position.

The idea behind Medium Duration Bond Institutional and Equity Index Investor pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.